Two years after AOL (AOL)’s Steve Case beguiled Time Warner’s Jerry
Levin with a thrilling vision that new-era growth would propel the merged
company far into the next decade, Richard Parsons, the C.E.O.-designate for AOL
Time Warner, formerly declared the dream dead.
It happened on Jan. 7, in a State of AOL Time Warner conference
call. “We expect revenue and EBITDA [industry parlance for ‘cash flow’] growth
for the first quarter to be essentially flat ,”
Mr. Parsons said, putting extra emphasis on the last word. “Last year, we made
certain economic assumptions and ran right into a major recession,” he
continued. “As a result, we got no credit for our achievements because of the
high expectations that we ourselves created. Going forward, our assumptions
about the economy will be more conservative. It simply is not prudent to
forecast the economy in a volatile world.”
Bob Pittman, now the chief operating officer–designate for AOL
Time Warner, was sitting right next to Mr. Parsons during the call, and he
might well have cringed. For it was he and his fellow AOL alumnus, chief
financial officer J. Michael Kelly, who throughout 2000 and most of 2001 had
peddled a slick 30 percent growth message to an all-too-gullible Wall Street
community. AOL Time Warner was different, Mr. Pittman smoothly assured
investors as Internet and technology companies keeled over left and right. They
had 140 million–oddsubscribers-andthegreat growth engine itself in Dulles, Va.,
was still sucking in $23.90 apiece per month from 50 percent of logged-on
America.
Wall Street, though, caught on fast. A recession was a recession,
and AOL Time Warner, the biggest media company in America, couldn’t be immune.
On the sell side, analysts downgraded their numbers. Merrill Lynch’s
influential cable analyst, Jessica Reif Cohen, started the trend on Oct. 17
when she revised her rating on the company to neutral from buy-to the barely
suppressed ire of Mr. Kelly and Mr. Pittman. Even the queen of cheerleaders,
Morgan Stanley’s Mary Meeker, took down her numbers last week; she maintained
her strong buy rating, of course, but raised some blunt questions about the
sustainability of the AOL growth model. The stock, at $32 and change, was an underperformer-far off its pre-merger high of
$91, and the province of short sellers far and wide.
So yes, the mood on the conference call was dour. Indeed, Mr.
Parsons, Mr. Levin and the newly appointed C.F.O., Wayne Pace, seemed eager to
get on with it and put up as gloomy a picture as possible. First off, they
would take a $60 billion charge to earnings in the first quarter, reflecting
the difference in the price that AOL paid for Time Warner in January of 2000
and the sharply reduced value of its assets now. They would also pay close to
$7 billion in cash to Bertelsmann in order to buy out their former partner’s
stake in AOL Europe-which, it was disclosed, was losing $600 million a year.
And to top it all off, the forecast for revenue growth for the year would be a
snail-like 5 to 8 percent.
All of this dire news was delivered by C.E.O.-designate Mr.
Parsons and his doleful new C.F.O., Mr. Pace-both of whom are Time Warner men.
Mr. Parsons, a longtime Gerald Levin ally, has been a Time Warner board member
since 1991, and Mr. Pace is a former finance man for Turner Broadcasting
Systems.
The deep rumble of Mr. Parson’s boardroom baritone set an
appropriate tone for the evening. Yes, here was a man who knew how to present
the hard facts of life. A protégé of Nelson Rockefeller, a member of Sanford I.
Weill’s Citigroup board and President Bush’s favorite media guy-he co-chaired
the President’s Commission to Strengthen Social Security-the 6-foot-4 Mr.
Parson more than fills up a corner office with his gravitas. Even his choice of
words seemed apt for the moment: ” Going
forward, we will be more conservative ….
It simply is not prudent ” (a word few AOL executives have been heard to
utter). Blunt and reassuring, the tenor of Mr. Parson’s remarks were in sharp
contrast to Mr. Pittman’s; the only AOL representative on the phone call, Mr.
Pittman devoted most of his time to spinning reasons as to why AOL Time Warner
didn’t hit its numbers.
“The advertising recession was the drag on our company’s earnings
for 2001,” he said. “If we had had just half
of the advertising that we had in the year 2000, we would have easily hit our
original guidance of 30 percent EBITDA growth for 2001.” No doubt about it: Bob
Pittman is a man who is used to hitting his numbers, and one senses that he
still can’t believe he missed them. But here’s the thing: to plead if only is disingenuous to a fault. He
and his team were dishing out their forecasts as the advertising recession
built up before them like a massive tidal wave. As AOL’s chief operating and
market executive, it was his job to see it coming and adjust his forecasts
accordingly-something he and his growth-obsessed AOL gang did not (and perhaps
could not) do.
Following Mr. Levin’s surprise resignation, there was some
speculation that Mr. Parson’s tenure at the helm would be a short one, and that
Mr. Pittman-now in charge of all the operating units-would shortly replace him,
finally concluding AOL’s takeover of Time Warner. But the opposite now seems to
be the case. AOL’s core dial-up Internet business has matured, while the small
pockets of growth to be found within the company are coming from Time Warner
units like the high-speed Internet services at Road Runner and the success of
movies like Harry Potter and the
Sorcerer’s Stone and Lord of the
Rings , which between them have taken in a half-billion dollars domestically
so far.
In fact, the two major pieces of bad accounting news this week
hark directly back to AOL and its bygone glory days. The $60 billion charge
recognizes the fact that the AOL stock used to buy Time Warner was ludicrously
overvalued. And the contractual agreement to pay billions to Bertelsmann for
full control of an entity that bleeds a half-billion a year in losses follows
as well from a deal struck by AOL during the peak days of Internet fever.
In fact, there were many who felt that Mr. Levin’s
resignation-particularly in view of the $60 billion charge-was his way of
saying Yes, I was seduced by those
snake-oil salesmen from Dulles. Steve Case put one over on me: AOL stock was
never worth 90 bucks, 70 bucks or even 50 bucks . Indeed, a recent report by
Morgan Stanley attaches a fair value of only 38 dollars to the stock. But all
the same, Mr. Levin got the last laugh: While Mr. Case remains ceremonial
chairman, it will be Jerry’s man, Mr. Parsons, running the company. In Dick
Parsons, he has appointed a C.E.O. in perfect chime with dour economic times. A
realist and an accommodator who’s as comfortable at a Lincoln Center opening as
he is lobbying regulators in Washington, a personal friend of a popular
President as well as of powerful Federal Communications Commission chairman
Michael Powell, Mr. Parsons is perfectly positioned to lead AOL Time Warner to
the next stage.
“I am 100 percent committed to the strategic vision that drove
Steve Case and Jerry Levin to fashion the merger of AOL Time Warner in the
first instance,” Mr. Parsons stated
Monday. Fair enough-but it was never his deal to begin with, and what the
conference call this week brought into sharp relief is that the deal itself was
a drastically mispriced one.
Those who fashioned it-Mr. Levin and Mr. Case-are now in retreat;
those who hyped it-Mr. Pittman and his crowd-are still breaking a sweat. But
it’s the man who inherited it, with realism and cold assessment-Dick
Parsons-who, for the time being, owns the AOL Time Warner stage. And it would
be genuinely surprising if he exits it anytime soon..
